Philadelphia Reflections

Commentary: Agency for Mid-Course Corrections

Among the many things we don't know about the future, is the average longevity eighty years from now. The whole-life insurance industry prospered when they sold policies assuming American longevity of 47 years in the year 1900, and it turns out to be 83 today, still growing fast. If longevity should get shorter, as it recently has in Russia, life insurance would go out of business. Since we can't rely on projections, we have to rely on early observations and make mid-course corrections.

President Lyndon Johnson both underestimated how much Medicare would cost, and how politically successful it would be. He was in no position to multiply 50 million Americans times $11,600 per year per person, times 22 years per person. That simple sentence tells you all you need to know about current Medicare costs, but who knew? Nor could he know how fast longevity would grow, or how fast the cost would rise. But we can monitor the trend, extrapolate, and revise the extrapolation. Medicare was a medical success, which had to be paid for; and President Johnson's successors might have found that out a little sooner, and changed course. If we must find fault, failure to readjust early would be my candidate.

So, who is counting?

Quis custodiet custodies?

For reasons obvious or not, the nation would be well served to create a monitoring agency for the guidance of future Congresses in charge of the type of Health Savings Accounts we already do have, and maybe some related issues. When we start envisioning lifetime coverage, it becomes even more vital to have a permanent agency to sort out what is happening. This is particularly important when the Branches of the Federal Government are divided between the two parties. Informally, the subcommittees of the Appropriations Committees have assumed much of the burden of overseeing agencies. They are the only Congressional Committees to review every program every year. However, the Agencies have grown to be the largest bureaucracies in the government, and tend to become jealous of their independence, as the Appropriation Committees grow too burdened to bother with them. It begins to look as though we need more Congressmen if we want Congress to maintain closer control of the agencies. Each Congressman now represents a million constituents, and simply cannot do all we would like him to do. As much as anything, we need a core group who worry about issues in advance and have the prestige and access to make their views be heard. Rather than design a blueprint, let's review some issues that such a body might explore.

Proposal 8: Health Savings Account Age Limits Should be Extended, from the Cradle to the Grave. A few extra years might be a minor improvement in special cases. The real benefit would be to create a continuous account, which could grow over long periods of apparent inactivity.

Proposal 9: Instead of annual contribution limits, the limit for HSA should extend over several years, or even be a lifetime limit. When deposits must be skipped for health or occupational reasons, there should be an opportunity to catch up. Athletes and similar occupations tend to concentrate on earning power in a few years.

Since the HSA is increasingly accustomed to augmented retirement income, thought should be given to extending the idea to amounts of money which could encourage that use. Furthermore, there are special circumstances, like a partial Medicare buyout, in which a limit to deposits forces a choice between two desirable uses for the same money. If the individual has the money for more than one purpose, it seems wrong to force a choice. For example, it's considerably safer to over-deposit more than you believe you will need, planning to return the excess. As a practical matter, the usual danger is overoptimistic revenue projection. Someone who sells his business at age 63 might have enough cash, but still, encounter trouble with the $3300 per year limit because he once needed the income to run the business. It seems pointless to squeeze through such a narrow window, and much better if the window were at least enlarged to permit lump-sum deposits up to a $ 132,000-lifetime limit. With that sort of cushion, plus a stretch of reasonably good health at the right time of life, it would become considerably safer to take risks. At age 65, a lifetime of health costs is already in the past, but the curve of health expenses starts to bend upward at age 50, at a time when college expenses for children may be persisting, and the house isn't quite paid for. It seems a pity to cripple a good idea with pointless contribution limits that almost stretch far enough, but leave people fearful. If Congress develops a serious interest in lifetime insurance, the yearly contribution limit should be revisited. The optional side use for retirement should be examined in parallel, including its potential for being gamed.

Revisited by whom? Someone should be empowered to travel, and talk to people in the field. Maybe hold hearings, maybe just interview. A simplified goal is, therefore, to accumulate $80,000 in savings by the 65th birthday, intending to make a single-premium buy-out. That clarifies costs, but is it practical on a large scale? Remember that savings get a lot harder when earned income stops. With the current law, you would have to wake up and start maximum annual depositing of $3300 by your 50th birthday, to reach $80,000 by age 65, and you would need generous internal compounding to make it. But notice how easily $100-200 a year would also get you there, starting at age 25 (see below), even justifying somewhat less optimistic investment income returns until age 65.

Many more frugal people might skin by with looser rules; It even could rather easily be subsidized for poor people and hardship cases. If you are going to cover lifetime health costs instead of just Medicare, many more will need $80,000 to do so and have something left to share with the less fortunate. But to repeat once again, that still compares favorably with the $325,000 often cited as a lifetime cost. That's all we care to promise in public, but secretly we know it may not be enough. The plain fact is, if longevity or inflation get out of hand, someone must have the authority to raise the contribution limits and to do that, there should be some research by a trusted house actuary.

Proposal 10: Instead of the present annual limit of contributions to Health Savings Accounts of $3300 per year, Congress should permit a lifetime limit of $132,000, with annual deposit limits adjustable to bring accounts at their present age, up to what they would have been if $3300 annually had been deposited since age 25.

Proposal 11: Congress should reserve decisions to itself for changing the lifetime contribution level, and review final appeals from contract terms which seem to threaten imminent major adjustment to the general public lifestyle.

The Cost of Pre-funding Medicare. Rates of 10% compound income return would reduce the required contribution to $100 per year from age 25 to 65, but if the income were only 2% would require $700 contributed per year, and at 5% would require $300 per year. Remember, we are here only talking of funding Medicare, as a tangible national example,

It is this calculation, however rough, which has made me change my mind. It was my original supposition that multi-year premium investments would only apply up to age 65, and that would be followed by Medicare. In other words, HSA should only be implemented as a less expensive substitute for the Affordable Care Act. It seemed to me the average politician would be very reluctant to agitate retirees by proposing a plan to eliminate Medicare. They would feel threatened, the opposing party would then fan the flames of their fears, and the result would have a high likelihood of undermining the whole idea for any age group, for many years. Better, I thought, to take the safer route of avoiding Medicare, and confining the proposal to working people, where its economics are overwhelmingly favorable.

But when the calculations show how close this proposal under cautious revenue projections could come to failure, and when nothing else remotely close to it has been proposed by anyone, the opportunity runs the risk of passing us by. So, I have changed my mind. The moment of opportunity is too fleeting, and the consequences of missing it entirely are too close, to worry about the political disadvantage of doing the right thing. The transition to a pre-funded lifetime system will take a long time to get mature, and the political obstacle course preceding it is a daunting one. At least we should allow it as a demonstration option, where some fears will prove unwarranted, while others can be corrected.

So we make the guess of the average life expectancy where things will eventually flatten out, will then be about 91. (Be careful, most census figures are for life expectancy-at-birth.) But many people would have to be lucky in all details: a favorable investment climate for the right ten-year periods, plus a favorable health situation which avoids expensive illnesses just at the age when they begin to threaten. Some life-saving scientific advances would be a big help, too. Using a lower goal of $80,000 and an interest rate of 7% is considerably easier to conjure, but the barrier which might be reached first is the $3300 yearly contribution limit. Some unfortunate individuals might be forced to pay all medical expenses out of pocket in order to make the investment fund stretch, even before the average becomes affected. The individual who came up short might still remain considerably ahead of where he would be without an HSA, but we are using a precise match of revenue and expense, to simplify the examples.

Someone who sells his house or business at age 63 might have the cash, but still, have trouble because of the $3300 per year deposit limit. It seems pointless to squeeze through a narrow window, and much better if the window were enlarged to permit lump-sum deposits up to a $ 132,000-lifetime limit, adjusted for inflation and compound income returns. With that sort of cushion, plus a stretch of reasonably good health at the right time of life, it would become considerably safer to take the risks. At age 65, a lifetime of health costs is nearly in the past, but the curve of health expenses starts to curve up at age 50, at a time when college expenses for children may be persisting, and the house isn't quite paid for. It seems a pity to cripple a good idea with pointless contribution limits that almost stretch far enough, but leave people fearful. If Congress develops a serious interest in lifetime insurance, the yearly contribution limit should be revisited.

The simplified goal is, therefore, to accumulate $80,000 in savings by the 65th birthday, remembering that savings get a lot harder when earned income stops. With the current law, you would have to start maximum annual depositing of $3300 by your 50th birthday, to reach $80,000 by age 65, and you would still need generous internal compounding to make it. But notice how easily $100-200 a year would also get you there, starting at age 25 (see below) and less optimistic investment income returns until age 65. Many more frugal people might skin by with looser rules; poor people and hardship cases could more easily be subsidized. If you are going to cover lifetime health costs instead of just Medicare, many more will need $80,000 to do it and have something left to share with the less fortunate. But to repeat once again, that still compares very favorably with the full $325,000 which is often cited as a lifetime cost. We have already imposed an extra $80,000 internal savings requirement in order to include Medicare; here is the place it would be a hardship. That's about as far as concentrated thought will carry you. It leads to the conclusion that it might be better to modularize Medicare and let the public pick and choose what it wants to buy its way out of.

The Cost of Pre-funding Medicare. Rates of 10% compound income return would reduce the required contribution to $100 per year from age 25 to 65, but if the investment income were only 2% would require $700 contributed per year, and at 5% would require $300 per year. Remember, we are here only talking of funding Medicare, as a well-understood national example, Obviously, a higher return would provide affordability to many more people than lesser returns. When $100 competes for the investment income from 10%, it's much easier than $300 competing for 5% income. Let's take the issues separately, but don't take preliminary numbers too literally. They are primarily intended to alert the reader to the enormous power of compound interest, and the big difference made by relatively small changes in it. Let's go forward with some equally amazing investment discoveries which are more recent, and vindicated less by logic than empirical results.

A transition from term insurance to pre-payment of Medicare is greatly eased by forgiving the premiums and payroll deductions, which are roughly age-distributed, and can, therefore, be forgiven in a graduated manner for late-comers to the program. Most cost-redistribution of high-cost outlier cases should be handled through the catastrophic insurance, which is well suited for invisible and tax-free redistribution. Because of hospital cost-shifting, inpatients are temporarily overpriced but are quickly becoming underpriced as a result of hospitals gaming the DRG to shift costs to outpatients. This will in time affect the relative costs of Catastrophic and Health Savings Accounts and must be carefully monitored for mid-course adjustments. This changing horizon of cost shifting reinforces the need to create a special agency to keep track of it. And to report its findings to Congress, who can consider the broader political implications, once they know the facts.

Proposal 12: Congress should create and fund a permanent Health Savings Account Agency. It should have members representing subscribers and providers of these instruments, with the power to hold hearings and make recommendations about technical changes. It should meet jointly with the Senate Finance Committee and the Health Subcommittee of Ways and Means periodically. It should have extensive access to the appropriate Executive Branch department, to review current activity, detect changing trends, and recommend changes in regulations and laws related to the subject. On a temporary basis, it should oversee inter-cohort and outlier loans, leading to recommendations about the size and scope of inter-subscriber loan activity. At first, it might conduct the loan activity itself, with an eye toward eventually overseeing a commercial vendor.

Cost Sharing with Frugality.At present costs, statisticians estimate future healthcare costs of about $325,000 (in year 2000 dollars) for the average lifetime. We could discuss the weaknesses of that estimate, but even though it's breathtaking, it's the best guess available. Women experience about 10% higher lifetime health costs than men. Roughly speaking, how much the average individual somehow has to accumulate, eventually must equal what he spends by the time of death. The dying individual himself has little interest in what is left unpaid at his death, so Society must do it for him, in order to survive as a Society. At this point, we, unfortunately, must also work around one of the great advantages of having separate accounts.

On the one hand, individual accounts to create an incentive to spend wisely, but it is also true that pooled insurance accounts make cost-sharing easier, almost invisible, and tax-free. Cost sharing induces reckless spending of other people's money, however, while individual accounts induce frugality with your own money. Therefore, linking Health Savings Accounts with Catastrophic insurance provides a way to pool heavy outlier expenses, while the incentive for careful money management remains in the outpatient costs most commonly employed (together with a special bank debit card) to pay outpatient costs. Such expenses are much more suitable for bargain-hunting anyway because dreadfully sick people in a hospital are in no position to argue or resist.

But a cautionary reminder: linking individual accounts to frugality through outpatients, as well as linking heedless spending to insurance through inpatients -- induces hospital administration to game the system we have here imagined. There's no doubt a system can be gamed by shifting medical care to the outpatient area, but we must expect the DRG to be attacked, in order to reverse such incentives, which run in the hundreds of billions of dollars. A well-informed monitoring system simply must be created and funded, if we ever expect the decision to hospitalize patients to rest on whether the patient needs to lie down, instead of on what kind of payment system we happen to fancy. At the same time, the present DRG coding system must be considerably improved to withstand being subverted. These are not tasks which congressmen typically enjoy, but they must be done within the legislative branch if we expect it to function.

Standard Deviation within and between age cohorts.Furthermore, there is an important distinction between a mismatch of revenue to expenses caused by chance within one age group and a revenue mismatch between two age cohorts. To put it another way, somebody has to pay off these debts, and we must have a plan about who should pay them when revenue is not present in the account. Borrowing between subscribers within the same age cohort should pay modest interest rates to forestall gaming, but borrowing between different cohorts for things characteristic of their age level (pregnancy, for example) should pay no interest if at all feasible. Unfortunately, people sometimes abuse such opportunities, and interest must then be charged. Until the frequency of such things becomes better established, this function of loan banking policy should be part of the function of the oversight body, rather than the executive agency, which tends to want to retain the function. When its limits become clearer, it might be delegated to a bank, or even privatized, but the policy must be monitored by specialists who understand what is happening "on the ground". While it is unnecessary to predict the last dime to be spent on the last day of life, incentives should be understood by the managing organization, separating routine cash shortages from likely abusive ones. And looking at all such activity as potentially having been caused by payment design. Much of this sort of thing can be minimized by encouraging people to over-deposit in their accounts, possibly paying some medical bills with after-tax money in order to build the fund up. Such incentives must be contrived if they do not appear spontaneously. User groups can be very helpful in such situations. People over 65 (that is, those on Medicare) spend at least half of that $ 325,000-lifetime cash turnover, but just what should be counted as careless overspending, can be a matter of argument.

Proposal 13: Current law permits an individual to deposit $3300 per year in a Health Savings Account, starting at age 25, and ending when Medicare coverage begins. Probably that amount is more than many young people can afford, so it would help if the rules were relaxed to roll-over leftover entitlements to later years, spreading the entire $132,000 over the forty-year time period at the discretion of the subscriber.

Finally, an observation. The classical Health Savings Account will save a big chunk of money, but who gets it will depend heavily on the health of individual subscribers because it is term insurance, year to year. Two concepts loom over it: (1) The nation may want to distribute the good and bad luck more evenly, and (2) It would be much easier to cut down an over-funded project than to supplement an under-funded one. If we can think of some ways to improve the product, we should start with as generous a benefits package as we can easily devise. Therefore, the rest of this book is devoted to making the returns more generous, and the outcome more predictable, sooner.

Originally published: Wednesday, September 24, 2014; most-recently modified: Sunday, July 21, 2019